Legal Question in Real Estate Law in California

Re: Is foreclosure an option?

You have a long list of questions that I am not able to answer. I can tell you that, if the bank forecloses on the home and it is sold for less than the loan balance, they cannot come after you for the difference. However, you'll have income imputed to you in the amount of the difference and you'll have to pay taxes on that amount. In other words, if the home sells for $600k and the loan balances total $560k, you'll get a 1099 for the $40k difference.

Re: Is foreclosure an option?

I think Mr. Berger got his numbers turned around. The 1099 will be for the shortfall, so if the house sells at foreclosure for $560,000 but the loan was for $600,000, you'll get a 1099 for $40,000, at least from a professional or institutional lender. Some private lenders may not know about this.

You ask if California is a default judgment state. I think you mean to inquire whether California allows deficiency judgments. The answer is that California has several laws restricting the right of a lender to seek a deficiency judgment, including just about flat prohibitions where (1) the foreclosure is done by private sale, e.g. sale by a trustee under a power of sale in a deed of trust; and (2) where the loan in question is a purchase-money loan and not a cash-out refinancing loan. Whether a refi with no cash out, either with a new lender or the original lender, allows a deficiency judgment seems to be up in the air now, with some appellate decisions likely in the near future.

Two possible problems even if the above protections apply: (1) you might be sued for fraud if your loan application misrepresented any material fact; and (2) if you failed to take care of the place so that its collateral value suffered badly, you could be sued for "waste," meaning wasting the lender's collateral.

Without more facts, I would lean toward discussing the situation with the lender candidly, and not filing bankruptcy - you could lose the equity in your OR property.

Not sure either what you mean by 80/20; usually this means you started out with a 20% down payment and an 80% loan. So, you must have lost more than 14% of market value (after allowing for a 6% commission if you sold) in order to be "under water" on an 80% loan-to-value mortgage.

One possible strategy is to hang on at some personal sacrifice until you retire, or at least until late summer, to see if market values recover. There is a bit of a recovery in my area - values are still below one year ago and two years ago, but higher than last month, so we seem to be bottoming out at last. Ask a local broker.